Forum Archive Index - March 2003

["Michael McGregor" <mikemcgregor@nzoomail.com>]

>Hi Bill,
>
>>
>>Philip Morris, the
>>tobacco company is the only publicly owned company in the United
>>States, possibly, the world (there are certainly none in New Zealand
>>or Australia),that has grown its earnings (as measured by earnings
>>per share) by more than 15% annually since 1960. So why do many
>>companies set targets in excess of this ' very difficult to achieve
>>number'.
>> 
>
>Personally I haven't seen a major NZ corporate state a goal of 
>growing earnings at 15% annually long term.
>
>Warren Buffett's goal of looking for a company that can consistantly 
>grow return on equity at 15% is not the same thing for one reason:
>
>1/ If a company is to increase its profits by 15% every year and ROE 
>is 15% then that company must retain *all* of earnings, and pay out 
>no dividends at all, to grow at that rate.   Most companies do pay 
>out at least some dividend.
>
>Warren's other goal, of looking for an 'internal rate of return' of 
>15% over ten years can normally only be achieved after that target 
>company has gone through a period of crisis.   Because the 
>sentiment of 'Mr Market' is near rock bottom when Warren buys, the 
>company does not have to increase its earnings by 15% per year to 
>satisfy Warren.  A large part of 'Warren's return' will come 
>simply from market sentiment returning to normal, or even becoming 
>overheated, for that share.
>
>> 
>>I have just started reading a NZ Book called"Finance" by Susan
>>Hansen. So far only reached page 19 in which she discusses Economic
>>Value Added. The Reality of achieving EVA In the past Telecom NZ has
>>been applauded as the only NZ company to leap the EVA hurdle since
>>1990.It did not achieve this in 2000 and 2001. 
>>
>
>EVA is different again.  I like the concept of the idea of figuring 
>out whether a company is using its capital wisely.  I don't like the 
>implementation via EVA though.   The problem, as I see it, is that 
>the EVA method uses volatility as measure of risk.   This means that 
>a more volatile share will have a 'higher cost of capital' and so be 
>less attractive from the point of view of EVA.
>
>However, as  Buffett style investor I like volatility.   When Mr 
>Market gets manic depressive this means I can buy a share cheaply.  
>When Mr Market gets over exuberant this means I can sell at a good 
>profit above fair value.   To me volatility is one of the prime 
>ingredients in the successful investment process.   So penalising a 
>company because it has 'high share price volatility' and therefore 'a 
>high cost of capital' just doesn't make sense to me.   
>
>The other problem I see with EVA is that is assumes past share price 
>volatility is a guide to future share price volatility.   I haven't 
>seen any evidence that this is true in practice.   So I don't use 
>EVA.
>
>SNOOPY
>
>
>
>
>
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>
>Hi Guys,
              Return on equity and earnings per share growth are not related
to each other. Return on 
equity is simply a measurement of how the net profit performed against the 
equity
employed. 
Earnings growth, on the other hand, is an indication of how much net profit
grew over the past 
year or an average of , say, the last ten years. For example, Home Depot has
achieved earnings 
growth of approximately 28% since 1978 and return on equity has averaged 19%.
The more 
earnings retained the more difficult it is to maintain the same or better return
in future years.   


Regards,

Mike M

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